Category: Financial Calculators

Time has a way of flying by. John and Jane were now 71 years old. This meeting was going to be one of the most important meetings I would ever have with them. This meeting was certain to prove to them that following my advice all these years was going to pay off.

As a result, I did a little extra preparation for the meeting by gathering information about the current cash values of their policies and their other assets. Their 401(k)’s had about $470,000 combined. The cash value of their life insurance policies was $4,588,332. This figure did not include the policies they had purchased for their two sons because they had given the policies to their sons as Christmas gifts a few years back after the boys had helped repay their student loans to the policies.

The business John and Jane had purchased and run for 10 years had been sold and the net proceeds from that sale were $184,000. I also opened the file with notes from all our meetings and read through it. I came across an interesting page of notes from the first meeting. They were 24 years old, newly married, and had $20,155 of credit card debt when they first came to see me at the insistence of Jane’s parents. John had wanted to get rid of the “terrible whole life policy” Jane’s parents had purchased for her when she was a baby.

He was insistent they needed a higher rate of return to get anywhere financially in life. In my notes, I had written a question I posed to them during that meeting: “Do you think it would be possible for the two of you to have $3,000,000 in assets by the time you are 70 years old?” Neither had thought it possible, regardless of the rate of return.

“John, Jane it is great to see you,” I greeted them with a warm smile and firm handshake.

“It is good to see you as well,” John replied. “Is it ok if we retire now?”

“You have certainly learned to be more direct in your old age,” I joked with him. “No, it is not the time to retire, but it is time to enjoy some passive income for a while. If you retire, according to one definition of the word, you are “taken out of service.” You still have a lot to give back to the community and to your grandchildren. How are they by the way?”

“Absolutely the cutest grandchildren on the planet,” Jane bragged. “If I knew having grandchildren was so much fun, I would have had them first!”

“For many years I have been telling you that when you understood the whole truth, sound financial decisions would be easier to make. I have a calculator that will help guide you as you start to live off your assets. It is called the Distribution Calculator. I have already loaded some information.

“What are we looking at?” Jane asked.

“The $654,000, is the total of your 401(k) balances ($470,000) added to the net proceeds from selling the business ($184,000). I am assuming you are going to get 5% return on that money and that you will live on the interest being generated by this amount of money. Of course, there is Social Security of about $50,000. So your net income will be around $77,055 per year.” I explained.

“That is not as much as I thought we would be able to have,” John said. “We haven’t been extravagant with much. We have saved roughly 12% of our income during our working years. Why isn’t there more?”

“You are also impatient in your old age,” I jokingly said. “But you are hitting on something that most of your peers are facing. Well, your peers who have not had the good fortune of working with our office. You, on the other hand, in addition to that amount, also have the cash values of your life insurance policies. Those are powerful and empowering assets. I am going to change this calculator to show an alternative use of your 401(k)’s made possible by your whole life insurance policies.”

“As I said before, the number labeled “Net Spendable” on the left side of the page, $27,055 per year, is what you will be able to spend if you live off the interest generated by your sum of money. Most people are locked into this scenario because they do not want to run out of money – which, by the way, is the biggest fear of people your age.

“The numbers on the right show how much you’ll have to live on each year by spending the interest and the original principle.”

“Wow, that is $20,000 more a year. It is almost twice as much as the numbers on the left,” John said.

“The numbers on the right are getting larger every year. Why is that happening?” Jane asked.

“On the right, you are withdrawing principle and interest from the account. Each year your principle is reduced the interest earned is also reduced, which require fewer taxes to be paid.” I explained.

“What happens when we are 92?” John asked. “Remember the life expectancy thing we did several years ago? I am supposed to live to 110. Will we be out of money?”

“The reason you can enjoy the spend down technique is that you have $4,588,332 in cash values of your life insurance policies. In other words, the cash values act as a cushion to you so you can spend all of your $654,000 you have worked so hard to save.”

“There are so many options for you because of those policies. For example, if you think you needed more income, you could annuitize $1,000,000 of your cash values today and have a guaranteed $60,000 a year income for as long as you live. That would bring your annual income somewhere in the neighborhood of $160,000 a year for 20 years and then reduce to about $110,000 when you are 92 ($60,000 from annuity plus $50,000 Social Security). But remember, you would still have $3.5 million in cash values that keeps growing.” I said.

“These are some impressive numbers. There are a lot of trips to the snow cone shack with the grandkids in those numbers. I cannot tell you what a relief it is to not worry about of running out of money. As you said, many of our friends are scared to ‘retire’ because they fear running out of money. I feel bad for them,” John lamented.

“Do you recommend that we annuitize $1,000,000 of our cash values?” Jane asked. “I don’t think we need that much income.”

“That is the whole point. You have OPTIONS. You get to decide what you want to do and when you want to do it. As long as you don’t do anything really crazy, you will never run out of money. That thought should not only be comforting, it should be exciting.” I said.

“Are you saying you are not going to be around to help us avoid something really crazy?” John asked.

“I am NOT retiring if that is your question. I love what I do and I love helping people understand the whole truth about money and then benefitting from that knowledge to become truly financially free.” I sort of boasted.

“Thank you. I am serious. Thank you for everything,” Jane said.

“Yes we could never thank you enough,” John added.

As they left, I thought about their last statement. Yes, I had made commissions working with John and Jane but that wasn’t the most valuable thing. The process of teaching them and having such long time friendships had a value I could not put a price on.

“Just fine, thanks,” John responded. “I know why you are calling; it has been a few years since we have been able to get together and we need to speak with you because we have been having some big changes in our family. Jane and I have been meaning to get in touch with you each time we get your email or card in the mail.”

“I never want to be a pest, but I am confident the financial strategies we put in place will make a huge, positive impact on your life.”

“That’s definitely true already. I can’t tell you what a difference the things you’ve taught us have made in our life, and in our thinking. Now that we are on the telephone again, it pains me to think it has been so long. Could we set up a time to meet with you? Maybe next Tuesday at 11:00?” John asked. “Jane and I could both take an early lunch.”

“That will work just fine. I have it written down. See you on Tuesday,” I said.

Present day……

“Jane and John, so nice to see you again. I understand a lot has happened in your lives since we last met, please update me,” I said.

“The most wonderful thing that has happened is we have had two children, sons. Their names are Todd and Jason. Todd is the oldest; he will soon be two. Jason is 10 months old,” Jane proudly announced.

“Pictures?” I asked.

“Oh here let me pull them up on my phone,” Jane said.

John started, “I have been wanting to talk with you about our boys. One of the best things Jane’s parents did for her was to purchase that $100 a month policy. I want to do something that awesome for our boys”

“I think that is a fabulous idea. In fact, I was going to bring it up with you, but you have once again beat me to the punch.” I complimented John. “Are you thinking of doing the same amount as Jane’s parents did for her 33 years ago?”

“I keep going back and forth. At one time I think, sure that is a great place to start. But then I go to the grocery store and realize things are a lot more expensive today. So I am thinking we should do a policy on each of the boys for $200 a month.” John said.

“Here is a picture of the two of them together,” Jane beamed. “I am in favor of the $200 a month for each of them. Since they were born, all I’ve been able to think about is providing the best possible future for them. Purchasing a policy is the best thing we can do. The second best thing will be to educate them on the value of their policies,” Jane said.

“I like the way you are thinking,” I said. “But, before we go further with the policies on the children, do you have any other questions?” I asked.

“Yes, I do. First of all, I’m wondering if you could help me see the ‘big picture’ view of our policies. I also wanted to discuss with you some additional income we have coming in. We’ve both had raises since our last meeting. We’re each taking home about $7,500 more than we were when we set up our original policies. That’s in addition to the $4,800 we’re setting aside for the children’s’ policies.” John explained.

“Great questions. Will you write those down on this piece of paper so we will be sure to cover them?” I slid some paper across my desk to him. “Let’s start with your salaries. You are fortunate to be getting raises and progressing in your careers. What are you thinking would be the best use of the additional- might I say ‘discretionary’- income?”

Looking a Jane, John said, “We have talked this over several times. We can’t think of a better place to put this money than inside our insurance policies. Can we do that?”

“When you purchased your other policies, we designed them right at the MEC limit. As you might remember, that meant you had some wiggle room to decrease your premiums, but very little room to increase your premiums.” I explained.

“Yes, I remember, now that you say that. You said that the MEC limit was not anything to be afraid of, it was simply a trigger to know when we should start another policy. I guess since we have this additional money, and our current policies will not hold that amount of money, we should just do applications for new policies on each of us,” John said.

“John, how would you like to come to work for us in this office?” I smiled at him. “You have a great memory and are right on target with what you said.”

I turned to my Life Insurance Summary calculator and input the numbers displayed on my screen. Now for your question regarding the “big picture,” John. Here’s a calculator that will let us see a summary of all your policies going forward,” I said pointing to my screen.

“So that is how much premium we will be paying including these 4 new policies we’re talking about?” John asked.

“Yes, it is,” I answered. “How much cash value will you have when you turn 40?” I asked him

“That is a lot of money,” Jane exclaimed. “Never in my wildest dreams have I imagined us having that much money. Don’t you think we should do something with it?” Jane asked.

“Go into those ‘wildest dreams’ you just referred to and tell me something you would like to do,” I said to Jane.

“When I was a kid I got to go to Disneyland only once. I want to take the kids to Disneyland.” Looking at John she asked, “Could we do that?”

“Jane, one of the best lessons we have learned here is that we finance everything we buy. How do you propose we finance a trip to Disneyland?” John said.

“As part of our budget, we set aside ‘fun’ money. If we looked at that amount each month as a repayment of a loan against our policies, I am sure we could come up with a budget for the trip.” Jane answered.

I was enjoying the conversation between these two. As I listened, I thought back to our first meeting – they were over $20,000 in credit card debt. I remembered how they wanted to get rid of the policy Jane’s parents had purchased for her. Then the thought occurred to me, how could a 25-year-old couple $20,115 in credit card debt, have over 3 million in assets by the age of 65?

“I do not want to get in the middle of your domestic decision process,” I chuckled. “But when you two first met me, you were $20,115 in credit card debt. In your wildest dreams, would you have ever thought that working with me would allow you to have over $3,000,000 in assets by the time you turned 65?”

“Not a chance,” John answered. “I am not sure that’s even possible now following what you have taught us.”

“Take a look at the projections of your combined policies when you reach 70 years old,” I said pointing the screen.

“Is that for real?” Jane said.

“I can’t believe it,” John said.

“That is the real amount you’re expected to have when you turn 65,” I responded. “Now a word of caution: You are starting to accumulate some cash value. When someone has cash, opportunities seek them out. I mean there is always something that comes up that seems like a good deal. Often though, the deal is not as good as it seems, and might derail this wonderful thing you have going.”

“We are not going to make a major financial decision without talking to you first,” John said emphatically.

“I agree. You have become part of the family. I trust your judgment as much as my own parents,” Jane added.

“OK. I just want to be your coach. Every decision you make should be yours. My intent is to equip you with the right kind of information and education that will allow you to make good decisions.” I said.

Mark Twain reportedly said that he tried to not let his schooling get in the way of his education. I think he was describing a paradox similar to what most advisors know as the “arrival syndrome.” Said in yet another way, your education should be an ongoing process. Such is the case with your clients. We recommend that you schedule regular discussions to help your clients understand the whole truth about money. And, of course, we are totally biased in thinking the best way to help your clients, is by illustrating situations with our calculators.

I admit it had been far too long since I had met with John and Jane Jones. In our previous two meetings, they had come to understand the power of Jane’s whole life policy in helping them get out of debt. They had also learned that even small differences in money owed can have a huge impact on their overall financial situation.

When we were able to meet again, Jane and John were both anticipating their 30th birthdays coming in about 6 months. To begin our third meeting together, we reviewed what we had discussed before. They had also updated their client fact finder sheet, and I was anxious to talk to them about those newly revealed facts.

Both John and Jane had been diligent at work and both had been rewarded with a $5,000 annual raise. Their raises were actually awarded to them almost 5 years before, a short time after our initial meeting, but they had not told me. I should have uncovered that fact in my questioning, hadn’t quite asked enough questions in our subsequent meetings. Around the same time they were given raises, they also hit anniversary milestones at work and became eligible to participate in the company’s sponsored 401(k) plan. They told me how they had met with an investment professional who had explained the wonderful tax benefits and the “free” money they would get from the company. In fact, they repeated his words to me, “There is no better place to put your money.” The “free” money or company match was 50% of their contribution, up to 2% of their salaries. In other words, the max contribution by the employer would be $500 a month.

“How do you feel about your decision to participate in the 401(k) at work?” I asked John.

“Well, it has been awesome these last 5 years, “John answered quickly. “Both the investment professional and our accountant said the returns are phenomenal.”

“What has been your return thus far?” I asked.

“So far we’ve gotten a 4% return, and as you can see,” he said, pointing to the statement on my desk, “we already have $29,125.” John proudly stated. “I know that doesn’t sound like a huge number, but our accountant tells us we are really getting about 15% return when we consider taxes.”

“Isn’t that a good feeling to have a good sum of money in an account somewhere?” I stated. Both Jane and John nodded in agreement. “I am going to put your numbers into my rate calculator and verify what your accountant is saying. When you started, you had a zero balance of course. You have been putting your entire raise of $5,000 a year into your qualified plan. But if the money just came to you as part of your income, you’d only get $3,750 because you get a tax deduction at your 25% tax rate. Your current balance as you said is $29,125.” I then pointed to my computer screen and said; “Yes it looks like the number is about 15%.”

“Wow, there are the numbers,” John said. “Oh but wait, you forgot the company match. Some of that 15% is because we work for such a generous company.”

“Yes, you are right.” I corrected myself. “I am glad you pointed that out. As I said to you before and I say often to myself, my family and others; when making a financial decision, it is always good to have the whole truth. With that in mind, let’s take a closer look at things. Since you two seem to have a good grasp of things, I am going to use a more sophisticated calculator. This one is specialized for analyzing qualified plans.” I quickly put in their numbers, being sure to include their employer match and pointed to the screen. “Here are the numbers.”

“Something is not right,” Jane said or maybe asked. “Our account balance is $29,125 not $30,981.”

“You don’t miss much do you, Jane?” I complimented her. “Do you know why my number is different from your statement?” I asked her.

After a moment of silence, she simply said, “No, but I am guessing you know.”

“I wouldn’t be a good advisor if I didn’t know what was going to come out of a calculation before I did them,” I said. “Actually you do know why there is a difference, you’ve just forgotten. I am pretty sure the investment professional that came to your work to help you get enrolled in the plan, told you they had some of the smallest fees in the industry. Well, when we put those fees 2% fees in, we should see a number that agrees with your statement.”

“I’m not sure that makes us feel more comfortable.” John retorted. “I know your calculator has the same numbers as our statement, but wow that is a lot of fees we’ve had to pay so far,” John complained.

“When will you stop paying those 2% fees?” I asked John.

“I guess never,” was his response. “But now I see something that doesn’t seem right to me. Our accountant says – and you verified – that we are getting 15.06% on our money.”

“Yes, you’re right again, but you are getting ahead of me – but that is awesome.” I smiled and said to John. “I am going to put in the effect of your tax deferral. You are in a 25% tax bracket so when I put that in your rate of return is…?”

“Exactly what we’ve said – 15%,” John said sounding a little more relaxed.

“Okay, let’s shift gears a minute and talk about how accessible this money is to you,” I suggested. “Let’s say for some odd reason you needed or wanted to take money out of this account. How much of a penalty or tax would you be required to pay?” I asked.

“If I remember correctly, we will have to pay our income taxes and since we are not 59 and 1/2 years old we will also have to pay a 10% penalty,” was Jane’s response.

“You are right – at least as the law now stands. But it could change right?” I said. “I will adjust my calculator to show what the tax cost and penalty would be if you withdrew your money.” Pointing to the calculator I asked, “Now what do you see?”

“Something I do not like.” John frowned as he spoke. “This calculator is telling us that the actual rate of return on our money if we decided to use it today is a measly 0.32%. That is not what the accountant or the investment professional told me. And, it’s not a number I find anywhere on our 401(k) statement.”

“How many people do you think would sign up for a program like this if that number were discussed?” I asked John. “I am willing to bet there would be very few. But let’s not dwell on the past because there is nothing you or I can do about it. But when you learn new information, you might want to change it if possible or make a different decision next time. Let’s imagine the economy improves and you are able to get 6% from now until you turn 65. At that time you decide to use your money. Do you see your effectual rate of return is 4.18%?”

I continued, “Please take note that your net account value is $410,341. Please write that number down so you’ll to be able to remember it. The next question – and I already know the answer, but here it is anyway: Would you like to have more money than that? Of course, you would. The easiest path to achieve that is simply getting a higher rate of return. But for a moment, let us just assume you decide to drop your contribution to $1,000 annually. What does that do to your rate of return?” I said pointing to the calculator.

Before he could answer I continued, “it went up didn’t it? Just so you know, the rate of return went up because a higher percentage of your contribution dollars were being matched by your employer. However, as expected, your net account value went down to $174,454, right? When we subtract that $174,454 from the previous number of $372,798 we get $198,344.” I handed John a basic hand-held calculator and allowed him to verify my numbers.

“That is what I get,” John said.

Now if we were to use a different financial tool, say a whole life policy, we would need to make sure we made up that $198,344, right?” I asked them.

“Right,” Jane chimed in.

“Since we fund the policy with after-tax dollars, we will have to pay our income taxes up front. So instead of having $4,000 to use, we will only have $3,000, i.e. $3,000 is the result of $4,000 minus 25% taxes. Are you following me? I want to be clear here, you do not get a tax credit when you put money into a qualified plan. When you earn money, you have a choice to either include that money and pay the tax, or not include it as part of your income and avoid paying the tax on it immediately. However, you will pay tax on it when you do include it as part of your income – in other words when you take money out of your qualified plan.”

I quickly put into the funding calculator a $3,000 annual premium for a male age 30 with a preferred health rating. Then I asked, “If you use that $3,000 and pay the premiums on a whole life policy, what will be your projected cash value at age 65? And how does that compare to the qualified plan?”

John and Jane looked at each other and smiled and then Jane started to talk. “For some reason, I knew you were going to show us something better. The difference is not huge – $198,344 less in our qualified plan, but having $209,820. Again, not huge, but about a 10% difference. John and I were talking about this on the way over. We are losing our confidence in the economy in general and in the stock market in particular. The numbers in your calculator for our qualified plan are based on the market always going up. The numbers here in the whole life policy, have guarantees, and the track record of the life insurance industry is much more reassuring.”

“I have never told you, but my uncle is a dentist. He followed to the ‘T’ everything his financial planner told him to do. He thought he had the world at his feet and was planning a comfortable retirement late 2008. But then the market went south. Well, the short of the story is, he is at work today trying to recover what he lost in the downturn. I simply like the safety of the whole life route.” Jane finished.

“Other than the track record and the guarantees, why do you like the whole life route?” I asked Jane.

“In one word, CONTROL,” Jane said rather emphatically. “With the qualified plan, just as you have already shown us, we do not have the ability to use the money in there. Our money is locked away in a type of prison until we are 59 and 1/2. Sooner or later we are going to have children and I am hoping I can stay at home and help them learn and grow. But I am not confident we will have enough money from just John’s salary. I am thinking I will need to start a business where I can stay at home.” Then looking at John she said, “Where will we get the money to start a business? Certainly not from our qualified plans because of the steep penalties and tax bite.”

Without looking at me, John answered Jane, “You’re right, I am feeling the same way. I like the whole life route so much better. In fact, I am going to HR this afternoon and cutting my qualified plan contribution to $1,000.”

Both Jane and John Jones were smiling as they walked into my office for the second meeting with them. The first meeting had gone well and I was excited to meet with them.

After a few minutes of catching up and pleasantries, I asked John, “If you were talking to a good friend and they asked what our office was doing for you, what would you tell them?”

John was contemplative for a moment and then started to speak. “Well the first thing I would tell them is that you have completely changed my thinking about whole life insurance and its value. You did not just convince me, but you helped me by using your special calculators, see the whole truth about how money works. In fact, I would probably tell them that your office has not tried to tell me what to think, but has rather helped me to learn how to think.”

“That is quite a compliment, thank you. I hope you have opportunities to say exactly that to people you care about,” I replied. “But I want to make sure you understand one critical thing: I never want you to assume my opinion to be correct. I want you to question everything I tell you. I want you to make your decision on your own – always. With that as a starting point, I want to approach an issue that I think is rather important. Are you ready to get into the serious side of our discussion today?”

Jane answered, “We definitely are! And, just so you know, my parents are so happy you helped us to see the wisdom in their decision to purchase that whole life policy for me when I was a year old. They send their thanks.”

I couldn’t help but smile. “Why thank you, Jane. That is very kind of you to report.” Getting a down to business, I told them about a recent study done by Lexis-Nexis. “Do you realize that 43% of American families own no life insurance? And of the 57% that do own it, 30% of those believe they have inadequate amounts of life insurance. Why do you think such a large portion of Americans are either under-insured or uninsured?”

“But I thought we were going to talk about purchasing a car – that is what we told you we wanted to talk about,” John said.

“Yes, I want to talk about that,” I replied, but humor me a little as I help you to see a very important financial truth. So why are so many people uninsured or underinsured?”

“Well, I guess it is because people have never met someone like you?” Jane said, almost questioning.

“Or maybe it is because they do not understand the value of life insurance,” John added.

“You are both on the right track.” I complimented them. “Have you noticed there is a disturbing trend in America that people do not understand the value of work?”

“Yes!” was their unified answer. “It seems that many of my peers do not know how to work or even value the fact that they have a job,” John added. “They just figure they can get another one if they don’t like what they’re doing or if something goes wrong with their employment.”

“It is a bit alarming, isn’t it?” I responded. “But an issue I believe is even more fundamental, is the confusion most people have about which of their assets is most important. What do you think most people would say is their most important asset?”

Once again both Jane and John answered together, “Their house.”

“You’re absolutely right – most people consider their home to be their biggest, most important asset. And it’s pretty safe to say that almost everyone has their house insured. But I disagree with that view. In fact, I think that perspective causes a serious lapse in financial judgment. A home – although definitely an important thing to have – is not the MOST important asset. The most valuable asset almost everyone has is the ability to earn their other assets. I believe – and tell me if you agree – that a person’s most valuable asset is their ability to work and make money. And yet very few have that asset protected sufficiently.”

John spoke up and said, “There you go again, helping us to see the bigger picture. When you put it that way, I can’t help but agree with you. I was surprised by the statistics you gave us, but knowing that information, it is even more surprising. Everyone should insure their best asset.”

“So then, how much insurance should they have on their most valuable asset?” I asked.

“As much as they can, of course. At least, that is what everyone does with their house,” John answered.

“I am so glad you said that John. Let me show you why. I want to show you another calculator called the Maximum Potential Calculator. I am going to use numbers for you both individually as you both are making about $45,000 a year. I am going to illustrate this until age 65. Let us assume that you will have a cost of living increase of about 4% each year.” Pointing to my computer screen I asked, “How much money will each of you potentially earn in those 41 years?”

“Wow that is a big number,” was Jane’s first comment. “Really? We are both on track to make nearly 4.5 million dollars by the time we’re 65?” Jane asked.

“Yes, that is the amount of money that will come into your life in the form of payment for your ability to work. Pretty valuable isn’t it?” I said. “There’s another important number to notice on this chart – what is projected to be your salary during the last year when you are 65?”

“$216,046. Wait, is that for real? It would be great to earn that kind of money.” John sounded a bit excited.

“Well John, let me ask you a question: will that $216,000 purchase more when you are 65 than your $45,000 salary purchases for you today?” I asked.

“Of course it will.” John blurted.

“Actually, the truth is this calculator shows the $216,000 salary you’d earn 41 years from now, is the equivalent of a $45,000 salary today.” I continued, “In fact you most likely will be able to purchase even less because of taxation.”

“That is depressing. But knowing that now can help me in the future. But what does all this have to do with our most valuable asset?” John inquired.

“The whole goal of home insurance is to replace your home if there is a complete loss. The same is true of life insurance. What is being replaced is your ability to work and earn money. In order to know how much life insurance you need, you need to estimate how much you will earn over time. Let me put this another way – what amount of money would you need in today’s dollars compounding at the same 4%, to be able to replace your ability to work and earn money? But we are getting ahead of ourselves. First, we need to look at another calculator, this one is called the cash flow calculator. Again using the same 41-year time frame we are going to use your net income ($29,250) instead of your gross income ($45,000) because the government will always get their share.” Pointing to the screen I asked, “what is the compounded value of your total net income?”

Looking for the red circle, John answered, “$7,367,704.”

“Great, but that is in dollars of 41 years from now. What we need is to know the present value of that amount in today’s dollars.” I quickly brought up a present value calculator and input the numbers. “What amount of money do we need today to make sure your ability to work and earn money can be replaced?”

“About a million dollars,” John said. After thinking a moment, John looked at Jane and said, “It looks like we each need an insurance policy for $1,000,000.”

“Yes, we do. We better do as we are learning and do the most important things first,” Jane said. Turning to me, she said, “We need to get going on protecting our family’s most valuable asset.”

“I am glad that issue is out of the way. I wanted to cover that with you before we got to your questions about purchasing a car. Like John said, we like to help our clients discover, learn and understand the whole truth about their financial environment. When you understand the whole truth, it becomes easy to know what decisions need to be made first. You two are great students and have a bright future ahead of you,” I said. “Now on to another important concept, purchasing a car….”

“Did you get the proposal we sent to you?” John asked. “You know that 0% interest loan seems like a no-brainer to me. But Jane really wanted to get your perspective before we made that purchase.” John added.

“I am so glad you did because there are a few nuggets of truth you need to understand. To start off, answer this question for me, ‘How does a car company make money?'” I asked John

With a puzzled look on his face, John answered, “By selling cars.”

With a little chuckle, I said, “You are right. But think further; why do all the major car manufacturers offer to finance your car for you? Is it possible they make money financing cars for people? In fact, the car companies make more money financing the purchase of cars than selling their cars.” I explained. “But then there is the interesting offer of 0% financing. If the financing is the major way they make money, why would they give that up?”

“I am not sure why they would, but isn’t that what they are doing with the 0% financing?” John answered and asked at the same time.

“How much does the car you are considering cost if you financed it with the manufacturer?” I asked.

“$35,000.” Jane volunteered. “Which will give us a monthly payment of $729.17.”

“Great. How much will it cost if you pay cash or finance it through an outside source?” I asked.

John beat Jane to answer, “$32,500.”

“So the car company will give you a rebate of $2,500 if you pay cash and drive off with the car. Let me show you what the car company is actually doing by using my rate calculator. “I input the numbers, using the rebate cost of the car with the SAME car payment. I then asked, “What interest rate are they charging?”

“3.68%?” Jane asked, confused.

“Yes, that is correct. By just raising the price they can call it 0% financing.” So here is the next question: should you purchase the car from the manufacturer, using your policy as collateral or should you finance it at the credit union?” I smiled as I asked them.

Thinking out loud, John said. “Well, at the manufacturer’s dealership our payment will be the same as at our credit union if they charge us 3.68%. But they have offered us a rate of 2.99%. So the better interest rate is at the credit union. I know using our policy is a great way to minimize opportunity costs.” Looking at me he then asked, “How much does it cost to get a loan from the insurance company?”

I wanted to jump up with excitement. At our first meeting, this 24-year man wanted to get rid of his wife’s policy, but now he wanted to use that policy to finance a car. “John,” I started “you are beginning to understand the real value of a whole life policy. But as I have said, a number of times, the whole truth is important. If you use your policy as collateral for a loan from the insurance company, the interest rate will be 5%.” I then waited to see what they would say next.

Again thinking out loud, but also looking at Jane, John said, “It seems to me that the credit union is the best way to go, unless I am not understanding something.”

“You are right. You have to remember that just because you have cash values doesn’t mean you have to finance everything possible using those cash values. You only use them when it is to YOUR advantage. This time, it appears the credit union is the best way to go,” I said like a proud teacher.

“Ok then, it is settled. This has been a great meeting. We will fill out an application for a $1,000,000 term policy for each of us right now. We will buy the car using the credit union as the financing tool and set up a time for our next meeting. Sound good?”

In the movie Mr. Mom, Jack (Michael Keaton) is fired from his job as an automobile engineer. Jack’s wife, Caroline (Teri Garr) lands a job before he can, so Jack takes on what he believes is the easy job of homemaker and caretaker.

The movie has many humorous scenes.

One particular scene Caroline’s boss comes to pick her up for a business trip. Jack does not want to come across as some helpless person so quickly gets in work clothes and comes into the house carrying a chainsaw. He asks the boss if he wants a beer, to which the boss replies, “it is 7:00 in the morning.” The conversation continues to be awkward as Jack remarks that he is doing a little remodeling. The boss asks Jack if he is going to be doing the electrical wiring and if he plans to use 220-volt wiring. Jack’s response, “Yeah 220, 221 whatever it takes” is classic.

Jack’s reply discloses how little he understood about electrical requirements for a modern house in the United States. Very few appliances actually use 220-volt electricity, but nothing – and I repeat, nothing – uses 221 volts. A simple 1-volt difference makes a huge difference.

So it is also with money – small things can make a huge difference. That was the case with some recent clients, Jane and John Jones.

As always, during our first visit with Jane and John, we collected as much financial information about them as we could using our fact-finding worksheet. The two of them had been married for a few years and were in their mid 20’s. Jane’s parents had been using a whole life insurance policy as a place to save for Jane’s future since she was a small child and had gifted the policy to her after the wedding. John was certain the policy was a big rip off based on what he had heard from radio and TV personalities.

He wants to cancel the policy. Jane did not, and of course, neither did her parents; they insisted John come in to meet with us.

One of the pieces of information we gathered was that John came into the marriage with “about $20,000” in credit card debt. The minimum payment on this $20,000 debt was $370 per month. That payment every month was simply killing them. In fact, one of the first things John said when we talked was, “We have $20,000 in credit card debt and we must get rid of it.” His solution was surrendering the policy and using the cash to pay off the debt.

For the purposes of this article, I am not going to spend much time on the fate of the policy but will simply illustrate why accurate numbers and clear understanding of money can make all the difference in the world – in other words, why knowing the whole truth is important.

The credit card company was charging the Jones 22% interest on their debt. When we plug the numbers into one our Truth Concepts calculators (see below), we see it will take about 260 months to pay off the debt. That is 21 years and 8 months with a $370 per month payment if they didn’t make any additional charges. Don’t be surprised by this enormously long time period to pay for credit card debt when paying the minimum amount.

Most people do not understand it, but thanks to the laws of the land, the credit card companies are required to print on every statement how long it will take to pay off the debt if a person only pays the minimum amount.

We have worked with a lot of people and because of the Truth Concept software, we knew having accurate numbers, ie: the whole truth, was very important.

So we dug a little deeper. We asked John to get the exact amount of the credit card debt, which was actually $20,155. If you’re thinking that isn’t a big difference, you’ll be as surprised as John was. Just like Jack in the movie Mr. Mom, John did not understand the importance of those “little” numbers. But take a look at the same calculator calculating the actual debt amount in loan balance:

Notice how a measly $155 in additional debt causes the number of months required to pay off that debt to jump roughly 105 months! Those numbers mean that $370/month x 105 additional months = $38,850 more John and Jane end up paying for their debt. That is no small amount of money, in fact, I would say it’s staggering. When we showed the two love birds this difference we certainly got their attention.

When it comes to money, financing, saving, and investing, understanding the whole truth about a situation can make a world of difference. You should work with competent people who work to educate and empower you to make better financial decisions.

New Truth Concepts Client Presentations!

The YouTube channel houses our Truth Concepts, Truth Concepts Academy, and Summit videos, as well as several presentation videos and Banking for Life excerpts and outtakes with Todd Langford.

Eight of the newer videos are from a client event at a local insurance brokerage. We recorded and “screen captured” Todd’s presentations and divided it up by topic. (FYI, Todd’s presentations followed a presentation by Nelson Nash, you’ll hear him refer to Nelson who is in the audience.)

Truth Concepts: How Banks Make Money (1 of 8)

Even most bankers don’t understand this. (If a bank has a 6% spread between the savings rate and lending rate for customers, they are NOT making 6% on their money!) The reality of bank profits – especially when interest rates are low – is frankly shocking. Approximately 15 minutes.

Truth Concepts: Maximum Potential (2 of 8)

As we mentioned in an earlier email, many advisors like to use this calculator in their first meeting with a client. It outlines what a client’s full financial capability and demonstrates that if you’re saving too little, a chasing higher rate of return isn’t necessarily the answer. Approximately 10 minutes.

Todd examines the real rate of return in a typical qualified plan. What impact does a company match, a typical fee, and taxes have on the dollars in a 401(k) or other tax-deferred retirement plan? It’s not a pleasant surprise to see how much of “our” money ends up in someone else’s pocket! Approximately 14 minutes.

Truth Concepts: Funding Calculator (5 of 8)

Todd Langford discusses whole life cash value in the context of other savings vehicles (with some interesting commentary on the “safety” of FDIC-insured accounts) and busts the “buy term and invest the difference” myth with hard numbers and compelling logic. Approximately 16 minutes.

Truth Concepts: Car Financing and Borrowing (6 of 8)

Todd shows the reality of “0%” vehicle financing, then compares the results of making major purchases through bank loans, cash purchases, certificates of deposit or whole life cash value. Emphasizes the advantages of having and using your own capital. Approximately 23 minutes.

Truth Concepts: Real Estate (7 of 8)

Todd explains the advantage of participating mutual company dividends and analyzes the powerful potential of using cash value to finance other assets and sound, cash-flowing investments. See how leveraging your cash value can produce exponential benefits when combined with other strategies and investments. Approximately 11 minutes.

Truth Concepts: Laffer Curve on Cash Flow (8 of 8)

Todd gives a contextual history of income taxes and how lower taxes can actually translates into more money for BOTH taxpayers and the government. Approximately 5 minutes.

Visit Truth Concepts on YouTube.com Today!

Can you see the potential of using Truth Concepts software to analyze various financial strategies and communicate with clients about essential financial concepts?

Join Todd in Houston for our next LIVE 3-day training for hands-on training with Truth Concepts calculators. At this writing, our next event is October 22-24, 2014 in Houston, TX. See our Truth Training page for current dates, details and registration.